Nov. 26 (Bloomberg) -- China’s stocks slumped, driving the benchmark index to its biggest drop in almost three months, on concern banks will sell more shares to meet swelling loan demand.

Bank of China Ltd., which said this week it’s studying options to replenish funds, declined 3.5 percent. China Minsheng Banking Corp. sank 5.6 percent after falling in its Hong Kong debut. Haitong Securities Co., one of the managers of Minsheng’s share sale, retreated 5.8 percent.

“I don’t think Chinese banks need to raise capital but I’m not risking it,” said Roger Groebli, Singapore-based head of financial market analysis at LGT Capital Management, which oversees about $75 billion in assets. “Investors are selling to avoid volatility until the picture becomes clearer.

The Shanghai Composite Index lost 119.19, or 3.6 percent, to 3,170.98 at the close, the biggest drop since Aug. 31. The gauge plunged 3.5 percent on Nov. 24 on concern banks will sell shares, before rebounding 2.1 percent yesterday. The CSI 300 Index fell 4 percent to 3,485.77, with all 10 industry groups declining.

Bank of China, the country’s third-biggest lender, dropped 3.5 percent to 4.13 yuan, the most since Aug. 31. Industrial & Commercial Bank of China Ltd., the largest, slipped 2.8 percent to 5.18 yuan. China Construction Bank Corp., the No. 2, sank 3.4 percent to 5.92 yuan.

China’s five largest banks have submitted plans to regulators for raising money after unprecedented lending eroded their capital, according to four people with knowledge of the matter.

‘Weak’ Sentiment

“Market sentiment towards Chinese banks has been extremely weak in the past several days given the capital raising concerns,” said Li Qing, a Shanghai-based analyst at CSC Securities HK Ltd.

Minsheng slumped 5.6 percent to 7.89 yuan as it became the first Chinese lender in four years to fall on its listing in Hong Kong listing, where its shares slid as much as 2 percent. The company this month raised HK$30.1 billion ($3.9 billion) in the city’s biggest public share sale since April 2007.

Haitong Securities tumbled 5.8 percent to 15.17 yuan. Other brokerages also fell. Citic Securities Co., the nation’s largest by market value, slumped 5.7 percent to 28.29 yuan, its biggest drop since Aug. 31.

An index tracking 50 financial companies on the CSI 300 declined 4.2 percent, accounting for almost half the losses on the main gauge. All 10 industry groups declined.

Steel, Oil

Baoshan Iron & Steel Co., the nation’s biggest steelmaker, lost 6.6 percent to 8.34 yuan after rallying 31 percent this month. PetroChina Co., the nation’s largest oil company, slipped 3 percent to 13.39 yuan. SAIC Motor Co., the No. 1 automaker, declined 5.3 percent to 23.72 yuan. The stock’s more than quadrupled this year.

China’s excess industrial capacity is “wreaking far- reaching damage on the global economy,” stoking trade tensions and raising the risk of bad loans, the European Union Chamber of Commerce in China said.

A 4 trillion yuan ($586 billion) stimulus package is worsening overcapacity, especially in the steel, aluminum, cement, chemical, refining and wind-power equipment industries, according to a study by the chamber and Roland Berger Strategy Consultants, released in Beijing today.

China has cut interest rates five times since September 2008 and encouraged $1.3 trillion of lending to boost domestic spending as the global recession curbed demand for the country’s exports. The credit expansion helped the Shanghai Composite rally 74 percent this year and home prices in 70 major cities climb at the fastest pace in 14 months in October.

Investor Draw

Investors opened 365,539 accounts to trade China stocks in the week ending Nov. 20, the most since Sept. 4 and a sixth weekly increase, according to the nation’s clearing house.

Fujian Expressway Development Co. fell 5.3 percent to 6.67 yuan, after saying it plans to raise as much as 2.5 billion yuan selling 350 million additional shares. Other toll-road operators declined. Shandong Expressway Co. lost 3.4 percent to 5.39 yuan, while Jiangxi Ganyue Expressway Co. dropped 4.7 percent to 8.04 yuan.

“Volatility is increasing,” said Wang Weijun, a Shanghai- based strategist at Zheshang Securities Co. “The market is now very sensitive to news about policy changes and fundraisings by companies.”

To contact the Bloomberg News staff for this story: Chua Kong Ho in Shanghai at kchua6@bloomberg.net

Last Updated: November 26, 2009 02:32 EST